Too Early For Private Equity Firms To Invest In Stressed Assets, Renuka Ramnath Says
Private equity investments in stressed assets still a few years away, says Renuka Ramnath.
Private equity firms will take at least a few more years to take interest in the stressed assets of Indian banks, industry veteran Renuka Ramnath said.
While she agreed that there have been a lot of good reforms like the Insolvency and Bankruptcy Code, Ramnath said the “whole system will take a few more years to come to equilibrium”.
She has a three-member team looking at possibilities of investing in stressed assets, the managing director and chief executive officer of Multiples Alternate Asset Management said. For now, the verdict remains “very, very early to invest”.
The government has been trying to curb India’s ballooning bad loans with a series of measures, the recent one being an amendment to the bankruptcy code that barred most of the defaulting promoters from buying back their assets.
These initiatives hold a lot of promise but one should not get too ambitious, said Ramnath. “If the market is realistic about the timeline, the measures will help the banks in a big way and allow for a lot of good measures,” she told BloombergQuint in an interview.
Watch the entire conversation here.
Where are you in terms of the private equity cycle? Are exits and investment going well in private equity funds?
I think so. Both activities are going well. But on the deal flow side, I would like to see innovative things happening in terms of carve outs and more M&As which is not happening. There have been more deal activity on secondary transactions, largely private equity or significant minority promoter shareholders selling their stake to move on.
How does you fund done over last 18 months? Have you managed to exit some of the bigger investments?
We have been very fortunate. We returned the capital along with the preferred return in our first fund in a door to door life of three-and-a-half years which is excellent as in between 2011-2014 the economy was very tepid. We have had excellent exits by way of IPOs and stake sale to private equity investors. We sold significant stake to Warburg Pincus bringing in credible long-term partner in to the company. So, it is being a very good run for Multiples.
Is your second fund half invested or more than that?
We have 75 percent invested.
What is the sector focus of that fund? What are the investments you have looked at for the second fund?
I have been a big propellant in having flexibility in investment strategy, which I have been saying from last 20 years and where India is today. I will continue to propagate that one should have lot of flexibility. Financial services continue to be a dominant thesis, which is true for every private equity fund operating in this country. Other than that I would say broadly in bucket of consumer and then followed by technology.
Are you preparing for third fund?
Yes, we are preparing for third fund and we should be in the market early next year.
Can you give us the size of the fund that you are about to raise?
Not yet but it will be larger than the earlier one.
How you see the investment in macro? How did you navigate the difference between underlying economy and valuations in public market?
As far as the consumer sector is concerned – where I would put it in large bucket, whether it is consumption of fashion or entertainment or financial products such as housing finance, there has been lot of demand. Our demographic profile is kicking in. But the capex industry has not really bucked up yet. We see no proposal for fresh capex investments. On the pharma side, if there are opportunities to invest in companies which are putting lot of money in research and development that is very interesting. Valuations have run up. In last 20 years at some point or the other valuations have looked very expensive. But some company deserves that valuations. Are you picking the right company for valuations has always been the question which I have asked myself as an investor.
Did you think that deal flow has slowed down a bit in terms of private and public companies?
No. I think it is in average. Even this year we will do $17-20 billion of private equity. So, it hasn’t slowed down at all. In fact, the markets are good, you will see good activity in private and public market because everybody finally enters and agrees to do trade when they get the value they believe they deserve. Opportunities are expanding.
I would like to see more consolidation happening in market. With Goods and Services Tax, global competition and the fact that we are fighting for human and financial capital which is very scarce, the game is only for highly distinctive players. As private equity investors over a period of time, we have become better at evaluating that which is the company which can rise above the rest. Which is the company which deserves the valuations which the market is willing to play. Even the private companies get compared to public companies. So, it is not that you have different valuations regime in public market and lower valuation regime in private market.
India is very peculiar country where sometimes private companies command higher valuations than the public companies. We had to deal with this kind of anomalies that you pay higher valuations for an illiquid investment. But your ability to gear this companies up in terms of performance, possibility and exploring the full potential is fantastic.
My favorite example is PVR. I invested in PVR when the market cap of the company was Rs 50 crores in 2003. At present, the market cap is close to Rs 6,500-7000 crores. That’s the journey one has done in traditional business. This is not digital or breakthrough technology. So, there are many opportunities where private equity investors can harness.
Your portfolios seems that you are not interested in Fintech and we didn’t see any obvious financial play. Can you explain why?
On consolidation, I am not talking about headline winning consolidation. We have a small company called Milltec. They are in rice milling equipment company. But the capability that they had in reaching to the farmers and setting up distribution and service capability allows them to consolidate much smaller players in that sector. This is one change that will happen in India where there are small pockets of excellence in terms of consumer connect or product or service capability which will become much more.
Are you using consolidation in flip term to formalisation?
It could be formalisation or professionalisation as there are many proprietary run companies which get to end of the tunnel when the proprietor is ready to retire or want capital which means that family cannot own the business by 100 percent. This could be a big opportunity. Players like private equity investors are ideally positioned to make that happen.
We have been looking at FinTech companies. One of the core capability of any private equity firm should be to access that stage of the evolution of sector at which you feel confident to enter. It is combination of your assessment of how this sector and company will play out and your capability to help the company navigate through that space. We invested in Dream11 which is very young company where angel investors and venture capital investors were head of us. But in this sector, we felt confident given the desire of youth in India not to be passively engaged with anything. Its active involvement. So, we felt it is very good thing to be actively involvement in sports combined that it was excellent management team and it was a unique platform, so we went in very early. As far as FinTech companies are concerned, we are evaluating number of them. We are not ready to say that we are making a commitment. Its not that we don’t enter early but it is right combination that has to be around.
As far as RBL Bank is concerned, we have just invested. We felt that RBL, being a young company which have no issues of legacy, is free to capture the wide space which is left wide open by lot of public sector banks and private banks who are busy sorting the legacy issues. Combined with a very interesting play to make the micro finance play happen in India where they can be the bank which can acquire this assets through many distributors and bring advantage of their liability and risk management side. We feel that RBL was in very unique plays to capture the potential of financial services play in economy. In South Indian bank we exit as we had good exit opportunity. Our business is to enter and exit.
Vastu Housing Finance is an incubation company. We have started from scratch and today we are doing disbursement of more than Rs 50 crores per month and expect to close the year end to Rs 100 crores per month. So, we are looking to build this housing finance company to be billion-dollar company. Although we are private equity fund, we feel that in plays like this, we can move from fund to fund by taking our investors into confidence and having transparent mechanisms to satisfy them and build the next large affordable housing finance company. We do make our selective bets and put lot of our energy and might behind it.
What could it take for you to be interested in infrastructure?
Sectors which are hugely depended on government concession is the sector which we will not look at. We are too young to be a company and we cannot afford any wrong call in our portfolio. We don’t have the might of large companies to go and fix large problems. When there are low hanging fruits in consumption and very bright entrepreneurs like that of Delhivery. We invested in Delhivery when it was a very young company and continue to remain invested with them. That’s the play which is more appropriate for multiples, to hand hold entrepreneurs and guiding them to the journey of building billion-dollar companies from $100 million companies.
What is the average growth rate that you believe can come in from branded apparel business and for how long? Is the runway long?
The runway is very long. The whole play on aspiration of India which we have seen in mobile phones where the number of smartphone usage is going up which is an aspiration play. Fashion is just beginning to play out. When Arvind Ltd. started U.S. Polo, they have modest expectation that what could be the size of opportunity and now they are dreaming of Rs 1,000 crore play in U.S. Polo.
For us, it is unbelievable that year after year we are showing growth of above 50 percent in brands like that. The aspiration story of India and the youth of India is beginning and the distribution network and ability to bring sophistication in understanding what will sell in which market and manage your supply chain is making the whole thing very viable. We expect the growth rate will last for 20 years.
Are you interested in stressed assets? What’s your view on Insolvency and Bankruptcy Code’s recent ordinance?
These are very difficult debates. I will be making a big mistake by looking at this problem from one angle and saying ‘keep the promoters out’. Stressed assets is a very important space for multiples. I have taken a call on investing in a team of three. It is still very early. There is one way to look at it is from an academic perspective is to question on the amount of NPA, bringing external capital, the provisions in bankruptcy code and one’s confidence that he or she can put your money in it. Answers to all of these questions is yes.
But from legislation to reality, it is a journey. Banks have to understand how to do this while they protect their interest the most. For them highest recovery is main goal. For other creditors, getting their money and running away from the company is their goal. As far as the private equity investors are concerned, it is about the value. What is it the value that you can create? What is the share of overall value that you should be allowed to keep? And how much to share with banks? These are the questions which are an issue to answer.
The whole system will take a few years to come to equilibrium. The good thing is we are taking lot of right measures. You put laws and practices into the market and the market will give shape in terms of how will you be practical to deliver this different value system to various stakeholders. We should not be too ambitious for the timeline and say that ‘nothing really happened, it is yet another disappointment’. if we are realistic about time frame then it will help banks in big way and it will allow for private equity investors.
One big point is for creating value, the most important thing is human capital. Only people create value and not the technologies or the market. You need a human to stand behind that and create value. Historically, I used to find it impossible to attract talent into private equity invested companies. Because the notion is you will come in and go out but then what happens to me. As a professional, I would rather work for MNC or a well-established business house. Today there is a flood of talent coming into private equity assets because of the openness that private equity investors have of sharing wealth with professionals and deep desire in large proportion of professionals to play an entrepreneurial role which is a big positive. We can harness it combined with specialised agencies like Alvarez & Marsal or many other consulting firms and long-term patient third party capital, like we provide. The stage is very well set but we have to give time and be patient in working with all stakeholders.
How long are you from your first stressed asset deal?
We evaluate a number of them but in a fund, we make 10-12 investments and we just cannot afford to get anything wrong. We can’t be very experimental, we have to be very sure. We have been fortunate to set a great track record from our first fund and our challenge is how do we beat that good track record in second fund and take the journey forward. But we are very excited about the opportunity.